Cointime

Download App
iOS & Android

The Allure of Profit

Validated Project

Introduction

The Bitcoin market found resistance this week, reverting from the weekly high above $30,456k, back down to a low of $27,169k. The opening to 2023 has been historically strong from a price performance perspective, with remarkably few significant corrections along the way, with the largest being -18.6%.

If we allow ourselves the assumption that the November low is indeed a longer-term low, we can see that the scale of drawdowns during this upswing so far, are small relative to past cycles.

With this as context, in this edition, we will focus on both the supply foundation formed over recent months, and then follow up with the profit taking behavior seen this week. We will consult several SOPR variants which offer a lens into the typical behavior patterns seen during corrections in a upswing, as compared to more structural bearish trends.

A Supply Foundation Below

With the strong opening to 2023, the aggregate market has confidently transitioned out of a regime of unrealized loss, towards one of unrealized profit, shown by the sharp divergence between supply held in profit vs loss. As this takes place, the incentive to take profits grows.

We can also see this by taking the ratio between Supply in Profit and Supply in Loss. This oscillator has achieved escape velocity this year, confirming the transition out of a regime of loss dominance near cycle lows, observed on only 415-of-4638 trading days (9%).

Mechanically, these large rebounds in unrealized profit occurs as price rallies above the dense concentration of supply which was accumulated during the bottoming formation process. We can quantify this mechanic by inspecting the 100 day change in profitable supply coming off major cycle lows in both BTC, and Percent of Circulating terms:

  • 2011 Cycle Low: +1.99M BTC (19.8%)
  • 2015 Cycle Low: +4.94M BTC (32.2%)
  • 2019 Cycle Low: +6.86M BTC (38.4%)
  • 2022 Cycle Low: +4.87M BTC (25.5%)

The current cycle has seen a comparable volume of the supply re-enter a profitable position, suggesting an equally robust floor.

Exploring Profit Taking Behavior

The Bitcoin spot price is currently trading between two popular On-chain pricing models; the Realized Price at $19.9k representing the average acquisition price of the supply, and the Realized-to-Liveliness Ratio at $33.0k.

This second model is akin to a HODLer Implied Fair Value 🟠, and will trade higher when more of the coin supply is dormant in investor wallets. Spot markets fell short of reaching this level this week, topping out around $30.5k.

This suggests that the market has transitioned out of the ‘deep-value’ zone as signaled by trading below the Realized Price, and has reverted back towards a holder implied ‘fair value’ level. With this, we can also expect an increase in the probability of profit taking behavior from coins acquired at cheaper prices.

We can evaluate changes in the accumulation and distribution behavior of various cohorts over the last six months using the chart below:

  • Phase 1: Heavy accumulation post-FTX across all cohorts, effectively starting the cycle low formation.
  • Phase 2: Distribution during the Jan-Feb impulse higher as the first significant rally after the brutal bear of 2022 rolled around.
  • Phase 3: Light accumulation on the rally back to $28k as market momentum increased, and prices finally broke above $30k.

Over recent weeks, we can see a mix of behavior, suggesting indecision across all cohorts bar the largest of entities with 10k+ BTC. This aligns with aggregate consolidation, the brief break above $30k, and the subsequent sell-off back to $27k this week.

Following on, the SOPR metric can also be used track the magnitude of profit and loss taking events across the wider market. Here, we define a framework consisting of two binary regimes, which we shall utilize to define market behavior patterns:

  • 🟥 Loss Dominant Regime: Successive prints below 1.0 indicate investors are locking in losses, whilst any returns to breakeven profitability is often utilized as exit point (forming resistance).
  • 🟩 Profit Dominant Regime: Successive SOPR prints above 1.0 indicates a return of profit taking. This is often accompanied by SOPR returning to breakeven being considered a near term value point.

A clear shift between these two regimes was noted in January, as market behavior started to exhibit patterns aligned with a profit dominated regime. With aSOPR currently retesting the break-even level of 1.0, this puts the market close to a decision point.

We can see a similar structure within the Short-Term Holder SOPR variant, as newly acquired coins have returned to an unrealized profit. The correction in March traded below the psychological $20k level, before experiencing a powerful reversion higher.

This is SOPR pattern is typically observed during constructive pullbacks, and provides a guide for interpreting moving forwards. A sustained period below 1.0 however, could signify a more onerous scenario, where underwater holders start to panic, adding further sell-side.

Long-Term Holder SOPR variant tends to better reflect macro market shifts. Following an extended period of realized losses (LTH-SOPR < 1.0), the LTH cohort are finally transitioning back into a regime of profitable spending, a structure similar once again to past cycle transition points.

This thesis was further explored last week (WoC 16), where the LTH cohort at the moment consist of many 2021-22 cycle holders, many of whom remain underwater, and are likely to create resistance throughout the market recovery.

A Return of Capital Inflows

In this final section, we shall inspect the changes in USD denominated profit and loss events, to put the above observations into context, relative to total market size.

The chart below shows, the magnitude of USD denominated profit taken this year, remains well below 2021 cycle highs. It is however of a similar scale to that observed in 2019. It is important to note that market prices rallied from $4k to $14k in 2019, which has a peak 50% lower than our current price of just below $28k.

This sentiment is also echoed across the realized loss domain, which continues to decline. Total losses remain quite low relative to all major sell-off events throughout 2021-22. This does suggest that a degree of sell-exhaustion has been reached at a macro scale, at least from the lens of wide-scale holders locking in significant losses (i.e. cycle top buyers).

Finally, we can evaluate the cumulative sum of all realized profit and loss events, more commonly referred to as the Realized Cap. After experiencing significant growth during both legs of the bull market in 2020-21, the Bitcoin network experienced a significant net capital outflow in 2022, contracting back to July 2021 levels.

The Realized Cap has finally stabilized in 2023, and is beginning to see growth, and positive capital inflows once more.

Summary and Conclusions

After a remarkably strong start to 2023, the BTC market has run up against its first appreciable resistance, reverting the rally up to $30k. This comes alongside a very large cross section of the market seeing their holdings recover above acquisition price, creating a more favorable, and profitable environment.

The aggregate value of profits realized remain relatively small compared to the size of the asset, however, they are of a USD magnitude equivalent to the 2019 rally to $14k. With accumulation and distribution behavior across several wallet cohorts mixed at the moment, the market appears less decisive than it has been in the first quarter of the year.

Disclaimer: This report does not provide any investment advice. All data is provided for information and educational purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

Read more: https://insights.glassnode.com/the-week-onchain-week-17-2023/

Comments

All Comments

Recommended for you

  • SBF ordered to forfeit more than $11 billion

    SBF has been ordered to confiscate more than 11 billion US dollars. SBF has now been sentenced to 25 years in prison.

  • Former CEO of FTX and Alameda Research Sentenced to 25 Years in Prison for Fraud and Money Laundering

    Sam Bankman-Fried, the co-founder and former CEO of FTX and Alameda Research, has been sentenced to 25 years in prison for fraud and money laundering. The judge criticized Bankman-Fried's behavior during the trial and deemed a 25-year sentence to be sufficient. Bankman-Fried's sentence may send a message to the crypto industry and there is no possibility of parole, but he may earn "good time" credit for good behavior while incarcerated. Bankman-Fried was found to have misused over $8 billion in customer funds and will be serving time in prison for his actions. The trial emphasized the importance of not using customers' funds without their knowledge or approval.

  • Web3 AI training company FLock raises $6 million in seed funding

    Web3 artificial intelligence training company FLock has raised $6 million in seed funding led by Lightspeed Faction and Tagus Capital. FLock will use these funds to develop its team and build a federated learning-driven artificial intelligence training platform.

  • Prisma: Vault owners need to prohibit delegation of contracts related to LST and LRT

    The LSD stablecoin protocol Prisma Finance stated in a post that for vault owners, please prohibit delegating authorization of the LST contract starting with 0xcC72 and the LRT contract starting with 0xC3eA.

  • MAS: Singapore is working on global first-tier fund tokenization regulation

    Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, introduced some fund tokenization pilots at an event for asset managers. These pilots are part of the Project Guardian and MAS Global Layer 1 (GL1) tokenization plans. Chia Der Jiun emphasized the advantages of tokenization in real-time settlement and process automation, which can improve efficiency and achieve greater customization of funds. UK asset management company Schroders and fund distribution platform Calastone are exploring this as part of the Project Guardian public blockchain trial in Singapore. A recent survey by Calastone showed that 96% of asset management companies in the Asia-Pacific region plan to launch tokenized products within three years. Chia stated that as these Project Guardian pilot projects approach commercialization, MAS is working with the pilot project managers to study the legal and regulatory treatment and impact of tokenized investment funds."

  • Indonesia's Financial Services Authority to Regulate Crypto Industry in 2025 with Evaluation in Regulatory Sandbox

    Indonesia's Financial Services Authority (OJK) will take over regulation of the crypto industry from the commodities agency Bappebti. Crypto firms must undergo evaluation in a regulatory sandbox before being licensed to operate in the country. The OJK aims to prioritize consumer protection and education, and firms operating without evaluation in the sandbox will be considered illegal. The sandbox provides a safe and isolated environment for testing and innovation development, helping to enhance security and responsible management in the financial sector. Once under OJK's oversight, crypto assets will likely be reclassified as financial instruments.

  • The Shenzhen Illegal Fund Raising Prevention Office issued a risk warning on the "DDO digital options" business

    The Shenzhen Office for Preventing and Dealing with Illegal Fundraising issued a risk warning regarding the "DDO digital option" business. The activities related to the DDO digital option business conducted in the name of Dingyifeng International are essentially the issuance and trading of virtual currencies. According to the "Notice on Further Preventing and Dealing with Risks of Speculation in Virtual Currency Trading" jointly issued by ten departments including the People's Bank of China in September 2021, it is clear that virtual currency-related business activities are illegal financial activities, and overseas virtual currency exchanges providing services to residents within China are also illegal financial activities. The activities conducted by Dingyifeng International in the name of serving residents within China are suspected of illegal fundraising and other illegal financial activities. Our office has organized relevant departments to carry out work, resolutely deal with illegal fundraising and criminal activities, and seriously investigate the legal responsibilities of relevant personnel. (Shenzhen Local Financial Supervision and Administration Bureau)

  • The Hong Kong Legislative Council plans to review the relevant stable currency consultation and sandbox legislation at the end of this year or next year

    Hong Kong legislator Wu Jiezhuang revealed that Hong Kong will release stablecoin consultation and sandbox (computer security mechanism), which will allow the industry to innovate digital asset projects in the sandbox environment. Relevant legislation will be reviewed in the Legislative Council at the end of this year or next year, which will help the entire digital asset industry ecosystem. Hong Kong has been improving the digital asset (virtual asset) market on different legal levels. Last year, there were regulations on virtual currency trading platforms and issuance systems.

  • Vitalik: Humanity needs to create a world where blockchain and artificial intelligence work together

    Vitalik Buterin, the founder of Ethereum, stated at BiddleAsia 2024 held at Signiel Seoul in the Songpa district on March 28 that artificial intelligence is a huge market and its importance is increasing day by day. We need to create a world where blockchain and artificial intelligence work together. Artificial intelligence can now create applications with 100 to 500 lines of code. Vitalik also stated that the ability to write 10,000 lines of code can eliminate most of the bugs in the Ethereum virtual machine.

  • Cointime March 24th News Express

    1.Moonbeam has completed the airdrop distribution of Polkadot ecological meme currency PINK2.The total number of Ordinals inscriptions minted exceeded 63 million, and the fee income exceeded 400 million US dollars.3.BOME founder: 2543 SOL will be transferred to the new address and sent to 415 wallets as a reward refund4.BottoDAO, a decentralized autonomous organization focusing on digital art NFTs, completed US$1.67 million in financing, led by 1kx5.The current open interest on Binance BTC contracts is approximately $7.13 billion6. Polyhedra Network: We are working on introducing zero-knowledge proof technology to Bitcoin to realize smart contract functions and high-speed cross-chain bridging.8.Stable currency project DYAD has been launched on the KEROSENEN airdrop query website 7.After the Ethereum Dencun upgrade, the L2 rollup gas cost for publishing Chainlink oracle reports dropped by 99% 9.Partisia token MPC was launched on multiple exchanges such as Kucoin, and an airdrop of 25 million tokens was launched to encourage ecological participation. 10.L2 Tech to Fuel Bitcoin (BTC) Price Rise